CLEAN TECHNOLOGY FUND INVESTMENT PLAN FOR INDONESIA

Transcription

1 CTF/TFC.5/6 February 18, 2010 Meeting of the CTF Trust Fund Committee Manila, Philippines March 15, 2010 CLEAN TECHNOLOGY FUND INVESTMENT PLAN FOR INDONESIA

2 Clean Technology Fund Investment Plan for Indonesia Executive Summary Introduction 1. This Clean Technology Fund (CTF) Investment Plan for Indonesia proposes CTF co-financing of US$400 million to support Indonesia s goals of providing 17 percent of total energy use from renewable energy (RE) and improving energy efficiency (EE) by 30 percent from business-as-usual (BAU) by Specifically, the Investment Plan proposes CTF co-financing for two programmatic areas: (a) scale up of large-scale geothermal power, led by the public sector with the prospects also for some private sector investments, and (b) acceleration of initiatives to promote EE and RE (especially biomass). The CTF investments will mobilize financing of up to US$2.7 billion from multilateral financiers, state-owned enterprises (SOEs), and the private sector. If additional resources are available, a second phase of the Investment Plan is expected to include investment in low carbon transport and other renewable energies. Country and Sector Context 2. Indonesia has made a strong economic recovery from the 1997 financial crisis. Its gross domestic product (GDP) grew at an average of 4.8 percent per year from 2000 to This strong economic performance has resulted in an annual 5.2 percent increase in primary energy consumption. Fossil fuels dominate the energy supply in Indonesia. To mitigate the local environmental impacts and diversify the fuel mix to hedge against the fossil fuel price volatility, the Government is launching a program to develop 10,000 megawatt (MW) of generation capacity by 2014 through a program of predominantly RE with a special focus on geothermal. 3. Indonesia is one of the world s largest emitters of greenhouse gases (GHGs). Land use change from peat and deforestation is the single largest contributor to GHG emissions in Indonesia. Interventions for mitigating such impacts are not eligible for CTF funding, though other funds are available for forestry. Ranked in the top 10 in the developing world, energy-related carbon dioxide (CO 2 ) emissions are dominated by industry, power, and transport sectors. The energy sector is the second largest source of CO 2 emissions in Indonesia. If Indonesia continues on a BAU path, its emissions will nearly triple by Priority Sectors for GHG Abatement 4. The Government of Indonesia (GOI) is committed to mitigating climate change. At the G20 meeting in 2009, President Susilo Bambang Yudhoyono announced that Indonesia would reduce GHG emissions by 26 percent by 2020, and make a further reduction of up to 41 percent with international support. The Government also joined the G20 pledge to phase out subsidies for fossil fuels. Indonesia is developing a strategic, multi-year policy and investment program for low-carbon growth, as outlined in the 2

3 National Action Plan for Climate Change (NAP 2007) and the Development Planning Response to Climate Change (2008). The President has established the National Council on Climate Change (NCCC) with representation from 15 ministries to coordinate Indonesia s climate change policies and international positions. The Government is establishing a climate change trust fund, and have developed a Green Paper and prepared its Second National Communication to the United Nations Framework Convention on Climate Change (UNFCCC). 5. The GOI has identified GHG reduction priorities in the energy sector, including (i) EE, particularly in the industrial sector; (ii) RE for power generation, primarily geothermal, but also including biomass; and (iii) low-carbon transport, especially public transport, vehicle efficiency improvements, and clean fuels. This CTF Investment Plan supports a broad programmatic approach that includes policy dialogue, capacity building and advisory services and transformational investments in the first two areas, while the transport sector is proposed for a possible Phase 2. Rationale for Selected Sectors for CTF Co-Financing 6. The priority activities selected for CTF co-financing are: a. Significant scale-up of large-scale geothermal power development: This includes (a) up to 260 MW geothermal power by Pertamina Geothermal Energy (PGE) to be co-financed by the World Bank; (b) up to 250 MW geothermal power by PT. Perusahaan Listrik Negara (PLN) to be co-financed by the ADB; and (c) development of about 300 MW of geothermal resources with private sector participation through risk mitigation efforts to confirm resources, with additional transaction advisory services and co-financing provided by the International Finance Corporation (IFC) and the Asian Development Bank (ADB) Private Sector Operations Department. These investments will nearly double the currently installed geothermal capacity in Indonesia. CTF financing would be used to (i) address the additional costs of geothermal power compared with alternative fossil-based sources so that these investments become viable and reflective of its environmental benefits in the investment decision; and (ii) reduce risks of early-stage geothermal exploration and field development that can be a barrier to development in the sector. CTF support will have the transformational impact of scaling up geothermal power in the country, which would substantially bend Indonesia s emission growth curve. Indonesia has the largest geothermal energy capacity in the world. Geothermal energy serves as an ideal renewable base-load source that would directly displace an equivalent need for future coal-fired power plants. These CTF supported investments will also help establish benchmarks for cost and performance for improved sector policy reforms, promote institutional learning, and economies of scale that could reduce, over time, the cost of geothermal development making it more competitive with conventional power. ADB has been working closely with the GOI and other partners on reforms in the power sector especially geothermal, which will continue through its upcoming 3

4 Geothermal Sector Development Program, To ensure long-term program sustainability and replication, the World Bank is also assisting the GOI in developing and implementing enabling policy frameworks to improve the investment climate for geothermal development, under a Global Environment Facility (GEF) funded project with the Ministry of Energy and Mineral Resources (MEMR). Furthermore, the World Bank is also designing a Framework for Carbon Financing for Geothermal Energy through a programmatic Clean Development Mechanism (CDM) approach to generate additional revenues to further improve the financial viability of geothermal projects. Together, this comprehensive set of reforms will ensure that the scale-up of the geothermal sector initiated through the CTF intervention will be sustained over time. b. Acceleration of initiatives to promote EE and RE, (in particular, biomass): CTF financing would be used for (i) risk sharing facilities and mezzanine financing with participating state-owned or private commercial banks to increase access to financing for small and medium enterprises (SMEs) and cover the incremental risk premium of EE/RE investments or to extend loan tenors; and (ii) direct lending to large end-users for EE/RE to reduce the cost of financing. The approach will also include technical/advisory services to help local banks evaluate EE/RE projects, with risk sharing facilities or partial risk mitigation structures to leverage existing bank resources into the financing of EE/RE activities in the private sector. CTF support would address financing barriers to small- and medium-scale EE/RE investments by SMEs, such as substantial transaction costs, high perceived risks, and limited expertise for assessing EE/RE projects. This would lead to increased confidence of local banks to jumpstart and mainstream EE/RE business opportunities. CTF support will transform the outlook of the Indonesian banking sector towards commercial EE/RE activities, and create a substantial financing market linking banks with firms interested to finance EE/RE projects. Experience from other countries (e.g., Russia, China) demonstrates that EE investments produce high rates of return for firms and are relatively low risk for banks and therefore can support significant financial leverage. Both IFC and ADB will provide technical assistance to commercial banks to help build staff skills in analysis and evaluation of EE projects, along with tailor-made financing instruments including lines of credit, credit guarantees and/or risk sharing facilities to crowd in bank financing for these activities. 7. Potential for GHG reduction: The geothermal investments of 800 MW can reduce CO 2 emissions by 5.1 million tons per year and over 100 million tons over a projected 20-year plant life. It is difficult to estimate the emission reductions from the EE component, given the fragmented nature of the investments. However, based on the World Bank/IFC EE investment portfolio, a US$1.1 billion investment in EE could save 2.0 million tons of oil equivalent (Mtoe) of energy that would result in an annual emissions reduction of about 5.5 million tons of CO 2. 4

5 8. Replication potential: Indonesia has a potential of nearly 10 GW of geothermal resources that is economically justified and an estimated 27 GW that is technically viable, which could double the existing installed power generation capacity for the entire country. Indonesia also has nearly 50 GW technical potential for power generation from biomass. The Government s Technology Need Assessment estimated an energy saving potential of 10 Mtoe per year from now to Development impact: EE and RE interventions offer local environment benefits of reduced air pollutants of particulates, sulfur dioxides (SO 2 ), nitrogen oxides (NOx) from avoided coal-based power plants. RE can enhance energy security by diversifying the energy mix, hedging against fossil fuel price volatility, and increasing the utilization of indigenous resources. The geothermal investments are part of the Second Fast Track Program to rapidly address supply-demand imbalances which have caused rolling blackouts in many areas of the country and threaten economic growth. Both RE and EE can also contribute to creating jobs and building more efficient domestic manufacturing industries. Furthermore, EE measures can reduce consumers bills, increase competitiveness of industries, and avoid or postpone the need for new generation capacity, whereby Indonesia would benefit from saving economic resources. 10. Readiness for implementation The GOI issued a Geothermal Law (Law 27/2003), making geothermal the only RE governed by its own law, and have established a dedicated directorate at the MEMR to oversee sector development. In addition, the Government is preparing a pricing policy that would eventually address the incremental costs for geothermal development, and includes, among other things, the support of carbon revenues. Furthermore, they are being supported by the IFC and the World Bank to competitively tender geothermal fields for development in an open and transparent manner. The geothermal projects proposed for CTF co-financing are also already included in the GOI Bluebook for external financing, and the World Bank project is included in its lending pipeline. Pertamina Geothermal Energy (PGE) has already prepared pre-feasibility studies, and the World Bank has provided a grant so that they can complete the remaining project preparation activities. The ADB has offered a grant to GOI so that PLN can complete its project preparation work. IFC has reached agreement with GOI regarding the provision of advisory services for geothermal tenders, and is in discussions with developers regarding financing opportunities. IFC has also launched a Sustainable Energy Finance project and has already been approached by several interested private commercial banks regarding EE and RE opportunities. 11. Additional costs and risk premiums: First, the levelized financial cost of electricity of geothermal power is more expensive than coal-based power. The current incentives and pricing mechanism are insufficient to attract investments at the scale necessary to meet the GOI target. Second, geothermal has high resource risks particularly at early stage of field development. Third, geothermal has a higher upfront capital investment cost, which poses financing challenges. In addition, Indonesia has limited institutional capability to plan geothermal development and sufficiently engage suitable developers. Finally, SMEs have difficulties accessing finance for EE and RE investments; commercial banks have limited financing tools, knowledge, and 5

6 understanding of such opportunities, and tend to impose excessive collateral requirements when financing is made available. Table 1: Financing Plan (all figures in US$ millions) Total CTF MDB PGE/PLN IBRD (geothermal) Private Sector/FIs ADB (geothermal) IFC/ADB (geothermal investment and transaction advisory) IFC (EE/RE) ADB (EE/RE) Total 3, , ,100 Table 2: Result Indicators Indicators Baseline Investment Program Results Geothermal 1,050 MW 800 MW new capacity Annual GHG emission reductions 6.7 Mton Additional 5.1 Mton Replication potential 1,050 MW 10,000 MW economically viable potential EE/RE Mtoe energy savings per year Annual GHG emission reductions Mton Replication potential 0 10 Mtoe energy savings per year 6

7 CURRENCY EQUIVALENTS (Exchange Rate Effective as of May 1, 2009) Currency Unit = Indonesia Rupiah (IDR) US$1 = IDR 9300 US$ = IDR 1 FISCAL YEAR January 1 December 31 ABBREVIATIONS AND ACRONYMS ADB Asian Development Bank KfW The Reconstruction Credit Institute of Germany BAPPENAS National Planning and Development Agency kwh kilowatt-hour BAU Business as usual LULUCF Land use change and forestry and peat fires BPPT Agency for the Assessment LUCF Land use change and forestry and Application of Technology BRT Bus Rapid Transit MDB Multilateral Development Bank CDM Clean Development Mechanism MEMR Ministry of Energy and Mineral Resources CO 2 Carbon dioxide MToe million ton of oil equivalent CP Cleaner production MtCO 2 e million ton of carbon dioxide equivalent CTF Clean Technology Fund MW Megawatt DPL Development Policy Loan NAP National Action Plan for Climate Change EE Energy efficiency NCCC National Council on Climate Change ESCO Energy service company NOx Nitrogen oxides FI Financial intermediary PCG Partial credit guarantee G20 Group of Twenty PGE PT. Pertamina Geothermal Energy GEF Global Environment Facility PLN PT. Perusahaan Listrik Negara GDP Gross domestic product PLN-G PT. PLN - Geothermal Gg Giga-grams PPA Power purchase agreement GHG Greenhouse gas PPP Public private partnership GOI Government of Indonesia RE Renewable energy GWh gigawatt-hour RPJM Indonesia's National Medium Term Development Plan for IBRD International Bank for Reconstruction and SME Small and medium enterprise 7

8 Development ICCTF Indonesia Climate Change SOE State owned enterprise Trust Fund IEA International Energy Agency SO 2 Sulfur dioxides IFC International Finance tco 2 e ton of carbon dioxide equivalent Corporation IP Investment plan TNA Technology Needs Assessment on Climate Change Mitigation ISO International Standards Organization UNFCCC United Nations Framework Convention on Climate Change JICA Japanese International Cooperation Agency WBG World Bank Group INDONESIA: CLEAN TECHNOLOGY FUND INVESTMENT PLAN TABLE OF CONTENTS I. INTRODUCTION II. COUNTRY AND SECTOR CONTEXT Greenhouse Gas (GHG) Emissions Energy Sector Transport Sector III. PRIORITY SECTORS FOR GHG EMISSION REDUCTION Energy Efficiency Renewable Energy Transport Sector IV. RATIONALE FOR SELECTED SECTOR OR SUB-SECTOR FOR CTF CO- FINANCING Geothermal Power Development Program Energy Efficiency and Renewable Energy V. ENABLING POLICY AND REGULATORY ENVIRONMENT VI. IMPLEMENTATION POTENTIAL AND RISK ASSESSMENTS VII. FINANCING PLAN AND INSTRUMENTS World Bank/IBRD

9 7.2 Asian Development Bank International Finance Corporation ANNEXES Annex 1: Renewable Geothermal Power Investment Program Annex 2: Financial Sector Transformation for Energy Efficiency and Renewable Energy 9

10 INDONESIA: CLEAN TECHNOLOGY FUND INVESTMENT PLAN I. INTRODUCTION 1. This Investment Plan (IP) is a business plan for the use of Clean Technology Fund (CTF) resources in Indonesia, including a pipeline of projects and notional resource envelopes. It is agreed between the Government of Indonesia (GOI), the Asian Development Bank (ADB), and the World Bank Group (WBG), and is based on Indonesia s Second National Climate Change Communication (2009), the Indonesia Green Paper (2009), the GOI National Energy Policy (2005), the Energy Blueprint , the National Medium-Term Development Program for (Rencana Pembangunan Jangka Menengah, or RPJM), the National Action Plan for Climate Change (NAP 2007), the Development Planning Response to Climate Change (2008), the Climate Change Roadmap for the National Medium-Term Development Program for (2009), Indonesia s Technology Needs Assessment on Climate Change Mitigation (TNA 2009), and other relevant sector development policies and programs. It also supports the new administration s 100-day program by indicating that concessional financing is being mobilized in support of key development objectives. 2. The IP builds on GOI s engagement with ADB, the International Bank for Reconstruction and Development (IBRD) and International Finance Corporation (IFC), and other donor agencies in evaluating resource efficiencies, cleaner production (CP), energy efficiency (EE), and renewable energy (RE), and cleaner fuels development during the past several years. 3. The IP is a dynamic document and this version is based on the economic development plans, investment programs, and mature project proposals considered at this time. As and when additional substantive mitigation proposals are formulated, they could be considered for inclusion subject to the availability of funds. The GOI is committed to creating a low-carbon development path: At the G20 meeting in September 2009, President of the Republic of Indonesia, His Excellency Susilo Bambang Yudhoyono announced a unilateral objective to reduce GHG emissions 26 percent by the year 2020, and proposed a goal of 41 percent reduction by 2020 with international support. GOI also joined the G20 pledge to phase-out subsidies for fossil fuels. II. COUNTRY AND SECTOR CONTEXT 4. Indonesia is the world s largest archipelago and has an ethnically diverse population of more than 230 million. It has considerable natural resources (timber, fish, petroleum, natural gas, and a variety of metals) and biodiversity. Following rapid growth and declining poverty in the early 1990s, the country witnessed a sudden deterioration of its gross domestic product (GDP) and heightened poverty during the period of , resulting from the Asian Financial Crisis. The economic development clock was effectively reset by the crisis, and Indonesia has emerged as a very different country with a truly democratic government, devolution of authority to provincial and local 10

11 governments, and a robust civil society (ADB CSP ). In social and economic terms, Indonesia has seen much progress since. Its real GDP has been growing at 5-6 percent annually since 2002, and has remained positive even during the recent global downturn. Public investment has steadily increased over the past five years; poverty has declined and public services are receiving additional resources. While Indonesia is doing well, it could be doing far better in the areas of poverty reduction, service delivery and governance. As a result, the country may yet fail to reach several of its Millennium Development Goals targets The key development objectives of the GOI are elucidated in its RPJM, which targets higher levels of pro-poor sustainable growth and the achievement of the Millennium Development Goals. Energy security, defined in the local context as ensuring adequate and reliable supply at affordable prices, features prominently in the RPJM along with consideration of lower carbon growth opportunities through RE, energy conservation, end-use efficiency, and more efficient transport systems. 2.1 Greenhouse Gas (GHG) Emissions 6. Indonesia s GHG emissions are globally significant. The GOI s recent Second National Communication on Climate Change to the UNFCCC provides the official figures on Indonesia s overall GHG emissions (Table 1). In 2000, total GHG emissions for the three main greenhouse gases (CO 2, CH 4 and N 2 O) were 1.4 million Gg CO 2 e, which has continued to increase in the aggregate over time. The most significant contributor to the overall emissions is from the impacts of LULUCF (Land Use Change and Forestry, or LUCF, and peat fires) 2. Interventions for mitigating such impacts are not eligible for CTF funding, though other funds are available for forestry. Therefore, the GOI is pursuing other means of support for addressing these key emission sources 3. Table 1: Summary of GHG emissions from from all sectors (in Gg) Energy 333, , , , , ,990 Industry 34,197 45,545 33,076 35,073 36,242 37,036 Agriculture 75,419 77,501 77,030 79,829 77,863 80,179 1 World Bank Country Partnership Strategy for Indonesia, FY Emissions estimates for LUCF and peat fires show considerable variability depending on the source study, and also display considerable inter-annual variation. The Indonesia Second National Communication to the UNFCCC attributes the differing estimates to alternate estimation methods and extrapolation techniques, and is actively working to improve the quality of such figures for the next National Greenhouse Gas Inventory. The same document indicates that the inter-annual volatility in LUCF and peat fire emissions is largely due to El-Nino impacts. For example, 2002 was an El-Nino year, when the emissions from LUCF and peat fires were significant higher than in other years. Despite these differences in estimates, there is considerable consensus that LUCF and peat fires make a uniquely substantial contribution to Indonesia s overall GHG emissions. 3 The GOI is currently pursuing a Reduced Emissions from Deforestation and Degradation (REDD) initiative with support from several donors, including the World Bank and ADB, as well as a UN-REDD (supported by UNDP, UNEP and FAO). Indonesia is also a participant in the Forest Carbon Partnership Facility and has expressed interest in joining the Forest Investment Program, both multi-donor supported climate financing instruments. 4 National Greenhouse Gases Inventory was estimated using Tier 1 and Tier 2 of the 2006 IPCC Reporting Guidelines 11

12 Waste 151, , , , , ,609 not LUCF 649, ,546 1,287, , ,280 available Peat Fire 1 172, , , , , ,000 1,119,814 Total with LUCF 1,415,998 1,379,222 2,584,181 1,226,191 1,711,443 +LUCF Total Without LUCF 594, , , , ,162 Note: 1. Emission from peat fire was taken from van der Werf et al (2008). Source: Indonesia Second National Communication to the UNFCCC, ,814 +LUCF 7. Energy use is the second largest source of GHG emissions behind LULUCF, and one of the fastest growing. Given its pace of growth, the IEA and other projections indicate that energy-related GHG emissions will become the dominant emission source by Although Indonesia s fossil fuel related CO2 emissions per capita remain low in comparison to other countries (Figure 1), its per capita energy use is increasing at about the same rate as GDP growth while emissions per capita (intensity) are increasing faster than GDP growth (Figure 2). This reflects the increasing contribution from the emission intensive sources such as coal for power generation and the rising use of motorized transport using petroleum-based fuels. Figure 1: Indonesia s fossil fuel-related CO 2 emission per capita remains low Source: International Energy Agency (2009) Figure 2: Emissions per capita outgrow GDP per capita 12

13 Source: IEA, 2007; cited in Low Carbon Development Options for Indonesia, November 2008, supported by World Bank. 8. The APEC Energy Demand and Supply Outlook of 2006 (APERC) and the International Energy Agency (IEA) Indonesia Energy Policy Review of 2008, both indicate that Indonesia s aggregate energy intensity (on GDP basis) peaked in the early part of this decade (Figure 3). According to the IEA, Indonesia s industrial and transport sectors continue to display high energy intensities, but residential energy intensity remains low and the country is also experiencing growth in the less energy intensive service sector. These studies also project the energy intensity in Indonesia to continue to decrease in the future, but these forecasts rely significantly on gains in energy efficiency. Figure 3: Energy intensity peaked around 2002 and started to decline Source: IEA,

14 9. The relative contributions of GHG in total emissions in 2004 by sectors utilizing fossil fuels are presented in Table 2. The data indicate that industry and electricity sector are both large sources of emissions, but that emissions from power generation, and to a lesser extent, from transport, are growing rapidly. The trend in emissions growth exhibited from is projected to continue particularly due to the continued motorization in the country and the considerable coal-based power expansion presently underway. Table 2: Fossil Fuel Emissions by Fuel Source and Sector Indonesia: Fossil Fuel Emissions (MtCO 2 e in 2004) By Fossil Fuel Source Share of By Fossil Consumption Total Coal Oil Gas Fuel Group Emissions Emissions growth '94-'04 Emissions Industry % 48% Electricity % 170% Transport % 74% Residential % 71% Total % 80% Source: IEA 2004, cited in Low Carbon Development Options for Indonesia, November 2008, supported by World Bank. 10. The Presidential Decree No. 5 of 2006 (PerPres No. 5/2006) on National Energy Management maps out a development path that attempts to balance this growth in fossil fuels with the increased utilization of RE. It aims to enhance the country s energy security by expanding the utilization of alternate indigenous energy sources and reduce the reliance on oil that is increasingly imported. Based on the Presidential Decree, the GOI intends to increase the use of coal from 15 percent of overall energy use to 33 percent of energy use over 20 years, while also increasing the share of RE to 17 percent. The RE targets include 5 percent geothermal; 5 percent bio-fuels; a combined 5 percent for biomass, hydro, nuclear, solar, and wind; and 2 percent from other (unspecified) sources (see Figure 4). Figure 4: Increased role of coal as well as renewable energy under the Presidential Decree 14

15 100% 90% 80% 70% 60% 1% 3% 15% 29% 5% 2% 5% 5% 33% Other Biomass, nuclear, hydro, solar, wind Geothermal 50% 40% 30% 20% 10% 0% 52% as of % 20% by 2025 (presidential Decree 5/2006) Biofuels Coal Gas Oil Source: Ministry of Energy and Mineral Resources; Presidential Decree 5/ Despite the targets established in Presidential Decree 5/2006 for a more diversified energy mix, recent trends indicate that most of the power generation expansion has been dominated by coal-based technology without significant development of RE. Accordingly, the GOI s Technology Needs Assessment on Climate Change Mitigation (TNA, 2009) assumes a business-as-usual (BAU) outcome where future power generation is fully based on coal resources with negligible attempts for EE improvements and conservation measures. Under the BAU scenario Indonesia s emissions will nearly triple by 2025 (Figure 4 - BASE), mostly led by the emissions growth in electricity and transport sectors. Such a possibility in emissions growth is an important consideration for today s investments toward future emission reductions. Therefore, Indonesia s current development plans call for reducing emissions in the power and industry sectors through investments in RE and EE. The TNA analysis indicates that the BAU trajectory can be redirected through measures such as the application of EE (Figure 4 RIKEN and RIKEN MAX), greater utilization of RE (Figure 4 PEMPALT), and the introduction of advanced thermal technologies. Should Indonesia manage to follow an alternative path to the BAU emissions trajectory, it is likely to realize the energy mix targets established in Presidential Decree 5/2006 and the President s pledge to reduce emissions by 26 percent by Therefore, the GOI is requesting CTF support to develop key areas related to EE and RE where there is transformation potential that can contribute towards achieving its energy and climate change targets. 15

16 Figure 4: CO 2 emissions will nearly triple under business-as-usual (BAU) NOTES: BASE Business-as-usual (BAU) scenario RIKEN Projection from BAU based on energy efficiency target of 15% RIKEN MAX Projection from BAU based on energy efficiency target of 30% PEMB ALT Projection from BAU based on application of advanced thermal power, nuclear and renewable energy technology CAPTURE Projection from BAU based on the application of advanced thermal power with carbon capture and storage technology Source: TNA report, Since the early 1990s, the GOI has been taking steps to address the energy and transport sector development challenges while attempting to address carbon related climate change impacts. These intentions are reflected in the following actions: Indonesia ratified the United Nations Framework Convention on Climate Change (UNFCCC) in 1994 through the Act on Ratification of Climate Change Framework Convention No. 6/1994. As part of the Indonesia s growing response to climate change, the country signed the Kyoto Protocol in 1997 and ratified it in 2004 through Law No. 17/2004. The RPJM will include new emphasis on climate change, low-carbon economic development, and energy security. EE and cleaner transport will feature prominently in the final version of the RPJM. The Ministry of Environment and the Agency for the Assessment and Application of Technology (BPPT) have prepared a Technology Needs Assessment for 16

17 climate change mitigation (March 2009), which provides a range of emissions reduction opportunities in energy, industry and transport sectors. GOI is creating the Indonesia Climate Change Trust Fund (ICCTF) which will support adaptation and mitigation activities with government and international donor contributions. The government has also prepared a Green Paper 2009 and the Second National Communications to UNFCCC. Energy Law No. 30 enacted in 2007 updates the legal framework for energy development. A series of enabling regulations and decrees support development of RE, biofuels, and coal bed methane. Energy subsidies to industry have been eliminated, while there are some attempts to reduce them to commercial and residential sectors. The new Electricity Law (UU 30 / 2009) provides an updated legal framework for the power sector. GOI sets ambitious targets in the energy sector: (i) providing 17 percent of total energy use from renewable sources by 2025; (ii) delivering 10,000 megawatt (MW) of new generation capacity in the proposed Second Fast-Track Program predominantly from RE with a special focus on geothermal power, which will contribute towards meeting the objective of 30 percent reduction of power sector emissions from BAU in 2025; (iii) improving EE to achieve demand side emissions reductions of 30 percent from BAU in The transport sector strategy includes (i) development of more efficient urban transport systems to facilitate a modal shift from private to public transportation, and (ii) development and deployment of cleaner fuels. 13. The GOI is committed to developing a low-carbon development path that moves away from the BAU approach towards a more climate friendly outcome. The GOI is developing a strategic, multi-year policy and investment program, as outlined in the NAP (2007, see Box1 on page 18) and the Development Planning Response to Climate Change (2008). Indonesia has embarked on a major policy-based borrowing program to support its own climate change development plans, with assistance from donors. The GOI is also establishing a climate change trust fund that can pool resources to support future efforts at adaptation and pilot projects. Finally, GOI is currently developing a low-carbon development strategy to highlight the way forward in implementing its comprehensive climate change related development agenda. These efforts are being supported by a number of donors and multilateral institutions that include Australia, Germany, Netherlands, the United Kingdom, ADB and the World Bank. To coordinate all of these climate change activities and establish the country s policy positions, the President of Indonesia has established the National Council on Climate Change (NCCC, Dewan Nasional Perubahan Iklim, DNPI) with representation from 15 ministries. Thus, Indonesia s commitment to climate friendly development is being demonstrated at the highest levels of the government making it a bright outlook for future prospects in this area. 2.2 Energy Sector 14. Indonesia is endowed with substantial energy resources that include both fossil fuels as well as a variety of RE resources. From the early days of independence until the 17

18 late 1990s, Indonesia was a major crude oil producer and exporter. Given this abundance, domestic consumption of petroleum products in the country was heavily subsidized, which also led to the development of the power generation subsector largely based on diesel and other petroleum-based fuels. By the 1990s, the crude oil reserve base was in decline and the Asian Financial Crisis contributed to the cessation of investments in new exploration as well as increasing the country s refining capacity. As a result, Indonesia has become a net oil importer. During this period, Indonesia also began to diversify its energy mix by developing its high quality coal reserves as well as its natural gas resources, which were being increasingly used for power generation. There was also a modest, yet significant, expansion of RE that included geothermal and hydro power. Despite this effort, Indonesia was unable to significantly reduce its dependence on petroleum-based fuels. The transportation sector continued to grow increasing its utilization of fuel while natural gas for domestic power generation became scarce since significant amounts were earmarked for exports. 15. Indonesia was at the epicenter of the Asian Financial Crisis in the late 1990s and its economy was badly affected and contracted significantly in its aftermath. As a result, there was excess power generation capacity in the country as the new millennium began. However, Indonesia has seen steady economic growth since, and the country s power sector has struggled to keep up with the high electricity demand growth triggered by the recovery. The financial position of the national power company (PT. Perusahaan Listrik Negara, PLN), already weakened by the crisis, further deteriorated due to the dramatic increase of oil prices on the international market from 2002 to PLN struggled to invest, requiring growing subsidies to maintain operations in a system that was still highly dependent on petroleum products where declining domestic production was being met with increasing levels of imports. Private sector investments also came to a halt during this period. Current power supplies barely keep up with demand which is increasing at around 8 percent per year, and brownouts and load shedding have become commonplace affecting economic growth and even ordinary consumers. PLN has estimated that some 2,500 MW of new power generation capacity is required each year in order to meet the growing demand. In 2006, the GOI devised the first Fast-Track program for the construction of 10,000 MW of coal-based power generation plants by PLN, which was viewed as the only readily available solution for utilizing abundant domestic coal resources to displace high-cost generation units in an affordable manner. This decision, along with existing heavy use of diesel, will further increase the country s dependence on fossil fuels, exacerbating local and global environmental impacts: an additional 10,000 MW of coal-fired power will add an estimated 55 million tons of CO 2 per year. Overall, estimates suggest that if this trend were to continue, it would result in a manifold increase in CO 2 emissions from the power sector over the next two decades. 16. In late 2008 GOI continued to expand its power generation capacity in order to keep up with demand by launching a Second Fast-Track Program to construct another 10,000 MW of capacity in which 60 percent will be comprised of RE, with geothermal accounting for about 4,800 MW and hydropower accounting for most of the other RE capacity. Geothermal power is one of the best options to diversify Indonesia s energy mix. It is a base load generation technology not subject to the intermittency and variability of most renewable electricity sources. As an indigenous energy source, it will 18

19 also enhance the country s energy security and serve as a natural hedge against the volatility of fossil-based commodity prices. As such, geothermal can directly displace coal-fired power generation. In addition, hydro power and biomass at various scales provide a useful opportunity to utilize local resources for grid-based power as well as for off-grid solutions to increase rural electricity access that will contribute towards alleviating poverty and improving people s quality of living. 17. The GOI has been reviewing electricity pricing and subsidy policies, since substantial economic distortions remain. Although some reforms have taken place, the aim is to further rationalize energy sector pricing, improving the targeting of subsidies to poor consumers, and promoting reforms necessary for the long term sustainable development of the energy sector. Energy subsidies still make up a substantial portion of the state budget. Since PLN continues to rely on petroleum-based fuels for a large part of their power generation, the increased international oil prices have driven their cost of supply from about US$0.06/kilowatt-hour (kwh) in 2004 to about US$0.12/kWh by Since these price increases were not passed through at the retail level to consumers, PLN required a subsidy of US$6.5 billion in 2008 to cover the resulting losses. Fuel subsidies represent an even higher cost to the Government budget, although the GOI has eliminated them for some sectors such as power 6, industry and specific categories of transport 7. As a result, the prospects for EE have improved, and opportunities will continue to get better as prices are further reformed and distortions are removed. Improved utilization of energy will not only make Indonesia economically more competitive, but also help reduce the strain on the power sector and reduce the burden on the national budget. Therefore, further rationalizing fuel pricing and subsidy policies remain an imperative for improving efficiencies, minimizing price shocks, and ensuring that the vulnerable are protected. 18. The GOI has also made strides to improve the policy environment so that reforms can take hold. The recently enacted Energy Law (UU 30/2007) and the Electricity Law (UU 30/2009) provide a renewed legal framework for the overall energy sector, with emphasis on economic sustainability, energy security, and environmental conservation. The Energy Law places high priority on development of domestic resources, including RE. The Electricity Law defines the regulatory and institutional framework for the power sector going forward, and is expected to further encourage RE and EE 8. Therefore, the energy sector is at a crossroads where, with continued reforms and appropriate interventions, it can move towards greater efficiency in a climate friendly manner while protecting the poor. 2.3 Transport Sector 5 Data from JICA, Study on Energy Conservation and Efficiency Improvement in The Republic of Indonesia, Final Report Summary; August PLN no longer receives subsidized fuels, and its purchases reflect international market based prices. Therefore, PLN is no longer driven to favor one primary energy source over another because of the fuel subsidies. 7 For example, the high grade gasoline for vehicles is no longer subsidized and domestic prices reflect levels based on international markets. 8 For example, via provisions for open access that will allow RE producers to sell power directly to endusers. 19

20 19. The Indonesian transportation sector is currently the nation s largest consumer of petroleum products and a primary source of GHG emissions. Although emissions from the use of coal have been the fastest growing compared to other fossil fuels during the last decade, oil is currently the main contributor to total emissions. Almost all of the energy consumed in the transportation sector (99.7 percent) comes from three liquid fuels: gasoline, diesel, and jet fuel. Combustion of these fuels leads to about 75 million tons of CO 2 per year 9. Gasoline and diesel contribute to over 91 percent of this total, dominating the transportation fuel market. 20. Figure 5 provides an overview of the factors affecting transport sector emissions. Categories of possible actions (across the top) include vehicle technology, fuel quality, vehicle maintenance, and modal shift. Within each category, there are a range of actions that can be taken, some of which have more effect on reducing local, hazardous pollution emissions (e.g., particulates, sulfates); while other actions have more potential effect on GHG emissions. 21. In keeping with its development position, Indonesia has made some progress with regards to vehicle technology, fuel quality, and vehicle maintenance. The GOI has imposed some standards on vehicle performance and fuel quality, but has not continued to upgrade and improve these standards over time similar to some neighboring countries. It is with this perspective that the GOI, faced with a variety of options to mitigate GHG emissions from the transportation sector, has thus far focused with modest success on fuel efficiency and quality. More efforts could be placed on developing attractive public transport systems that will lead to modal shifts from individual cars to public transport. Together, they would form a more comprehensive and integrated public transportation strategy leveraging all major factors that are responsible for the emissions arising from the transport sector. Figure 5: Factors affecting transport sector emissions Source: SwissContact, Analysis of Fuel Quality and Air Pollution Issues in the Road Transportation Sector. Technical input paper for low carbon options study for World Bank. With modifications from Kahn Ribeiro, et al, KLH,

21 III. PRIORITY SECTORS FOR GHG EMISSION REDUCTION 22. The NAP (2007) provides analyses of GHG emissions and a comprehensive assessment and program for both adaption and mitigation. Mitigation targets for energyrelated emissions include a 30 percent reduction from BAU during the period , and a 50 percent reduction from BAU during the period Indonesia s TNA report (2009) includes energy modeling, technology assessments and cost estimates which indicate that over 30 percent GHG reductions are technologically feasible by 2025 (see Figure 4 above). Emission reductions would be achieved through acceleration and expansion of a combination of a broad spectrum of demand- and supply-side EE, accelerated development of RE systems, development of clean-coal plants, and deployment of carbon capture and storage from fossil-fuel power plants. 23. Based on technology and cost analyses presented in the 2009 TNA report, GHG reduction priorities are in industrial EE, EE and RE in the power sector, and cleaner transport. This is also substantiated by a recent draft marginal abatement cost curve (see Figure 6) presented by the NCCC in 2009, in which it highlights the ranking of costs and abatement potentials of mitigation options in the power sector, as the following: (i) EE and conservation, particularly industrial end-use efficiency; and (ii) RE, primarily geothermal, hydropower, and biomass. The third option, which is proposed for a second phase investment if CTF funding is forthcoming, is (iii) cleaner transport. 10 Figure 6: Draft cost abatement curve for Indonesia s power sector 10 At present, the GOI has not identified any transport sector projects in its dialogue with the MDBs; therefore, public transport interventions are proposed for a second phase of CTF support if funding is forthcoming. 21

22 Source: National Council on Climate Change, Indonesia, draft, Indonesia s most recent policy document on climate change is the Second National Communication under the UNFCCC (November 2009). The Communication reports that energy is the largest non-land use source of emissions, growing from 333,540 Gg CO 2 in 2000 to 395,990 Gg CO 2 in 2005 which represents a 25 percent increase. The Communication further notes that, with RE and EE efficiency measures, emissions from the energy sector could be reduced by 2020 in a range between 35 and 40 percent compared with the BAU scenario. Mitigation options include increased power generation from new/renewable energy sources such as geothermal and increased EE in the transportation, industry and residential/commercial sectors. 25. Indonesia has also recently issued its Green Paper on Economic and Fiscal Policy Options for Climate Change Mitigation (Ministry of Finance, November 2009). For the energy sector, it proposes to: (i) impose a carbon tax/levy on fossil fuel combustion coupled with access to international markets, facilitated by negotiation of a no-lose target, and (ii) introduce complementary measures to incentivize EE and deployment of low-emission technology, exemplified by a specific geothermal policy strategy. 26. The identified GHG reduction priorities are being translated into actions (investments, programs and policies) through the following vehicles: NAP the NAP (2007) calls for a range of mitigation actions in the energy sector revolving around efficiency and renewables. These were translated into a set of initial investments for by BAPPENAS through the RPJM (2008). 22

23 Climate Change Roadmap reducing carbon emissions from the energy and forestry sectors are pillars of the roadmap that seeks to bridge the period between the NAP and the National Medium-Term Development Program Presidential commitment the President of Indonesia has recently committed to significant reductions in future GHG emissions. He has asked that nearly half of these reductions come from the energy sector and by reducing waste. The Government is currently formulating its proposals for achieving these targets. Box 1 Indonesia s National Action Plan (NAP) to Combat Climate Change Indonesia does not have any obligation to reduce its greenhouse gas emissions; however, it has demonstrated interests in playing an active role in the global efforts to tackle climate change. The NAP, which was released in November 2007, is a dynamic instrument to serve as guidance to various domestic institutions in carrying out a coordinated and integrated effort to address climate change. In the area of mitigation, the NAP identifies energy and land use change and forestry as key priorities where Indonesia will seek international cooperation and funding to support its effort. In the energy sector, the NAP establishes an emissions reduction target of 30 percent from BAU during the period , and a 50 percent reduction from BAU during the period The three main priorities areas of focus are diversification toward renewable energy sources, improving energy efficiency in industrial sectors, and implementation of cleaner energy technologies. Under adaptation, the NAP aims to target a range of key areas, including climate information forecasting to manage risk; agricultural intensification and irrigation technologies; water resources management improvements; energy and water saving technologies in the industry sector; and health sector improvements to prevent disease, identify impacts, and utilize natural medicinal plants. The NAP also focuses strongly on the need for institutional capacity building and for harmonization and revision of the regulatory policy framework for sustainable development management. The NAP outlines existing climate change response actions, including ratification of international agreements, creation of domestic institutions, passage of laws and regulations in the energy, minerals, and forestry sectors, and implementing programs to improve energy use, address forest and land fires, combat illegal deforestation, improve management of peat land, address flooding issues and conduct integrated coastal zone management. To implement the actions outlined in the NAP, Indonesia plans to utilize domestic public finance through new mechanisms and fiscal instruments; develop approaches for technology transfer from developed countries; and increase international support for its development priorities. 27. Beyond these specific actions, Indonesia has put forward three consistent development and climate change messages: (i) climate change cannot be addressed at the expense of the poor; (ii) climate investments must be consistent with development goals; and (iii) climate assistance must be on top of past development assistance commitments. 3.1 Energy Efficiency 28. GOI recognizes that EE gains are key to delivering improvements in commercial energy and electric power services. EE investments in particular can deliver benefits more quickly than large, capital-intensive, centralized generation plants. Indonesia s National Energy Policy and Energy Blueprint include EE and conservation components. These include operational elements common with the EE plans of many other nations. Successful operational agencies like PT Energy Management Indonesia have sound skills and experiences. Together they form a commendable platform from which to develop future EE and conservation efforts. The current policy framework also comprises the following key items: 23

24 a. National Energy Policy: Presidential Regulation No. 5/2006 and Presidential Instruction No. 10/2005 specifies the objective of reaching energy elasticity less than 1 in 2025 and energy mix in 2025 (oil can be reduced from 52 percent to 20 percent and the rest are to be contributed by gas (30 percent), coal (33 percent) and new and renewable energy (17 percent)). The enforcement of Presidential Instruction No. 10/2005 and its derivative (Ministerial Regulation 31/2005) are intended to enable EE investment opportunities. b. Energy Law No. 30/2007 states that utilization of energy has to consider energy resources potential and availability, therefore, the utilization of energy has to follow energy conservation directives/policy and the provisions concerning energy utilization is to be regulated by a Government Regulation (derivative of Energy Law). c. National Master Plan of Energy Conservation (RIKEN, Presidential Decree No 43/1991). Energy conservation target: 13 percent commercial/residential, 16.6 percent industrial, and 13 percent transportation sector in 1998/1999. d. National Energy Policy (KEN) provides the global energy conservation target of reduction of annual national energy intensity at 1 percent. e. Presidential Instruction No. 10/2005 requires the government sector to perform EE measures in government buildings and transport facilities. f. Ministerial Regulation No. 31/2005 outlines procedures and guidelines of energy conservation implementation. 29. The recently approved Electricity Law No. 30/2009 (Article 25) includes provisions to encourage use of local resources and RE, and stipulates that provision of electric power must optimize the utilization of technology processes that are clean, environment friendly, and efficient. While this new law pertains primarily to supplyside operations, removal of energy subsidies to industrial consumers sends appropriate market signals to stimulate demand-side EE investments in the near term Industrial EE, CP, and RE present excellent opportunities for GHG reductions because investments generally can be implemented more quickly than energy supply additions, and reduction in energy end use has a multiplier effect up the supply chain: with current transmission and distribution losses of around 11 percent, 0.89 MW of end use savings offsets 1 MW of centralized supply. EE investments are typically one-third to two-thirds the cost of centralized generating plants (or less) and represent virtually permanent energy savings. Recent analyses indicate that GHG emissions can be reduced by percent in industries, and percent through demand side management programs targeting commercial and residential sectors (e.g., TNA 2009, ADB Energy Efficiency Initiative Inception Report 2007, and IEA 2008). The TNA 2009 report estimates that 15 percent EE gains would result in 190 MtCO 2 e/year (see Figure 4 above). 31. Candidate sub-sectors identified for EE include: cement, iron and steel, petroleum refining and petrochemicals, fertilizers, pulp and paper, agro-processing, and textiles (TNA 2009). A variety of technologies are available for EE applications. Relatively low- 11 Removal of fossil-fuel subsidies is also part of the pledge made by GOI together with other G20 countries. 24

25 cost opportunities exist in most subsectors for more efficient pumps, motors, and boilers. More efficient mills and co-firing with biomass are applicable to the cement industry. Waste heat recovery for power generation may be feasible for energy-intensive industries including cement and iron and steel. Energy recovery from waste streams is particularly applicable to the agro-processing (e.g., palm, rice, and sugar milling) and pulp and paper sub-sectors. 12 IFC s 2009 study of EE and RE opportunities in the rice and palm oil milling industries found that these industries can generate five times their own power needs by utilizing biomass waste for co-generation. Many firms within these industries are already using biomass waste to generate energy to meet their own needs Many industrial plants in Indonesia rely on captive power units, and almost all industrial facilities (as well as most commercial and residential buildings) maintain diesel-fired back-up generating units. Efficiency gains of percent can be realized by upgrading back-up and captive generation units to micro-turbines, advanced cogeneration, and/or tri-generation (combined cooling, heat, and power). Existing diesel generator sets could also be re-tuned for co-firing of a diesel-biogas blend. Biomass cogeneration is being deployed on a few projects in some agro-industrial estates, 14 and biomass power is expected to expand as energy prices are further reformed and subsidies are phased out. 15 The feasibility of these projects depends largely on energy pricing and reliability of grid-supplied power; introduction of net metering could facilitate rapid implementation and scale-up. These factors will be carefully examined during the project preparation phase. 33. Potential supply-side EE opportunities which may be considered include: renovation of existing power plants, including technology upgrades for existing geothermal units; technical loss reductions in electricity transmission and distribution networks using advanced composite core conductors and smart grid technologies 16 ; and advanced energy storage technology to optimize utilization of intermittent RE resources. 34. EE opportunities are attractive based on potential GHG reductions and the ability to implement projects faster than large centralized generation plants, but are challenging due to the continued weakness in the energy pricing regime, lack of in-country project experience, and limited commercial bank financing. However, rationalization of some energy prices has improved the prospects for EE, while the GOI has committed to the further removal and eventual elimination of subsidies in the sector 17. Bilateral and multilateral supports can be mobilized for capacity building for local technical experts, while the CTF can assist in eliminating investment barriers by catalyzing commercial 12 E.g., the PT Budi Acid Jaya Biogas Project utilizes methane recovery from wastewater for power generation. This was successfully registered as a CDM project in Scoping Study on Clean Technology Opportunities and Barriers in Indonesian Palm Oil Mill and Rice Mill Industries: Final Report, prepared by IRG Philippines for IFC, Jakarta, March E.g., the Nagamas Biomass Cogeneration project in Riau Province utilizes waste biomass from agricultural processing. This was successfully registered as a CDM project in Indonesia has removed fuel subsidies for certain sectors such as specific industries, which has enhanced the viability and prospects of the EE measures being sought by the proposed engagement. 16 E.g., high-voltage direct current (HVDC) and advanced composite core conductor technologies can be deployed for expansion and upgrade of the power transmission grid, especially for inter-island connections. 17 As indicated by GOI joining the G20 pledge to phase-out subsidies for fossil fuels 25

26 bank financing via risk-sharing facilities, mezzanine financing, and financial support for energy management and service companies 18 (see further discussion in next section). 3.2 Renewable Energy 35. Indonesia has a variety of RE sources with substantial potential. They include biomass, geothermal, hydropower, non-conventional gas, solar, and wind, which all remain relatively under-developed. The estimated power generation potential from each of these resources is summarized in Table 3 below: Table 3: Estimated RE Potential in Indonesia Potential capacity (MW, Resource except as noted) a Potential Generation Output (TWh/y) b GHG Reductions (MtCO 2 e/y) c Biomass 49, Geothermal 27, Large hydro 75, Solar 4.8 kwh/m 2 /day Wind (Eastern Islands) 9, Sources: a RE potential from Ministry of Mines and Energy, cited in IEA 2008 Energy Policy Review of Indonesia, 2008; and TNA Notes: b Plant availability/load factors: biomass 70 percent; geothermal 90 percent; hydro N/A N/A 50 percent; wind 30 percent. c GHG reduction assumes direct offset vs. coal at 0.8 tco 2 e/mwh. 36. Indonesia has the world s largest known geothermal power generation potential at 27,000 MW, of which at least 8,000 10,000 MW is considered to be economically viable when its environmental benefits are considered. Although geothermal power has been utilized in Indonesia for over two decades, only a fraction of the potential resources a little over 1,000 MW has been developed thus far. However, geothermal power is one of the best options for expanding base-load generation capacity, as it is provides power on a 24/7 basis, providing reliable dispatch with plant availability factors which are typically higher than most similar power sources (e.g., more than 90 percent availability in many instances for geothermal vs percent for coal). With most of the prospects identified on Sumatra (13,800 MW), Java and Bali (9,250 MW), and Sulawesi (2,000 MW), geothermal resources are also ideally located in proximity to the largest and fastest growing power demand centers in Indonesia. Therefore, developing 18 The term energy service company (ESCO) refers here to a broad spectrum of potential service providers and does not specifically refer to the common international definition of ESCOs which work under performance and shared-savings contract mechanisms. In the Indonesia context, ESCOs may be expected to work in a variety of modes including stand-alone energy advisory services (audits and feasibility studies); engineering, procurement and construction management services; and performance contracting. 26

27 geothermal power can directly off-set an equivalent development of coal-based power and curtail the emission of GHGs. The GOI recognizes this opportunity which is a significant reason that geothermal capacity is so prominently represented in the next 10,000 MW Fast-Track Program to increase generation capacity. In fact, the GOI geothermal roadmap goes even beyond the 4,700 MW targeted by 2014 through the Second Fast Track Program, and aims to develop a total of 9,500 MW of geothermal power generation capacity by 2025 and help reach the RE target established in the Presidential Decree 5/ The GOI has also taken significant policy and institutional measures in order to try and enhance the investment climate so that financing can be mobilized at a greater scale for geothermal development. In 2003, Indonesia issued the Geothermal Law (Law 27/2003), making geothermal the only RE governed by its own law. The Law, amongst other things, provided regulatory authority in the sector to the Ministry of Energy and Mineral Resources (MEMR), grandfathered existing developers rights to develop the fields already concessioned to them, and mandated future geothermal development opportunities to be offered through competitive and transparent tenders. To oversee sector development, the MEMR has also established a dedicated directorate for geothermal which is responsible for managing and regulating geothermal development in the country. Under the auspices of the MEMR, substantial survey work has already been undertaken resulting in the mapping of 250 geothermal sites across the country with hightemperature geothermal resources. Based on these prospects, the GOI has established a Geothermal Road Map with targets for overall sector development. 38. The GOI is also continuing with its long-term reform program in the sector aimed at addressing several of the key remaining barriers so that greater levels of financing can be mobilized in the sector. This effort is being supported by the WBG Geothermal Power Generation Development Project by the World Bank funded through a US$4 million GEF grant and additional transaction advisory services for tendering geothermal fields by IFC, as well as by other development agencies (see Annex 1 for more details). Some of these critical reforms include, amongst others, the development of a pricing and incentive policy for geothermal, the transparent and competitive tendering of new geothermal concessions in line with the Geothermal Law, addressing sector risks, and increasing domestic capacity. These reforms will be also supported by the proposed Climate Change Development Policy Loan (DPL) which the GoI and the World Bank will prepare in It is expected that policies supported under this loan will enhance the regulatory environment for greater investment in renewable energy sources and improved fossil fuel efficiency. 39. The GOI is also attempting to increase the use of carbon financing in order to help scale-up sector development, which is being supported by the World Bank, ADB, and others. The MEMR, with the assistance of the World Bank, is preparing a framework for the programmatic application of carbon finance so that emission reductions from geothermal power can be traded streamlined manner extending beyond the current Kyoto Protocol commitment set to expire in 2012 Carbon Finance Framework (CFF) for Geothermal Development, currently under development with support from the World Bank s Carbon Partnership Facility (CPF). 27

28 40. Although these key reforms are underway, it is also understood that improving the investment climate will take time before sector development can be progressively scaledup, particularly to attract the necessary volume of private investments. There have been limited private investments in Indonesia over the last five years even in conventional power generation technologies such as coal 19. In geothermal, there has been only a single expansion of an existing field by a private developer 20 that has come on-line during the same period, while there have been no development of the riskier greenfields. Therefore, given the pressing need for increased power generation capacity and to meet the targets established in the Second 10,000 MW Fast-Track Program, the GOI has decided to immediately scale-up the development of geothermal resources that are under public control with key state-owned enterprises (SOEs) on a fast-track basis. In this regard, several SOEs have established dedicated subsidiaries for developing geothermal resources under their control. Pertamina, the national oil and gas company which has a history of developing geothermal resources in the country, has established Pertamina Geothermal Energy (PGE). They are expected to rapidly scale-up the majority of the resources that are publicly controlled. PLN has also established PLN Geothermal (PLN- G), which is also expected to contribute towards the GOI target by developing several prospective projects that have already been identified. 41. Biomass offers one of the best prospects for large-scale emissions reductions via distributed generation applications, and is technically viable where sufficient biomass resources are in proximity to industries which can deploy biomass cogeneration. Recent market assessment conducted by IFC concluded that some agro-processing enterprises could generate up to five times their internal demand, with the surplus available for export to the grid. These types of biomass power plants would be designed to operate 7,000 8,000 hours per year, and thus could provide dispatchable base-load power. However, security of biomass feedstock supply remains a limiting factor for developing reliable grid-connected capacity in other sub-sectors. Agro-processing, wood, and pulp and paper sub-sectors are good candidates for biomass cogeneration as a demand side efficiency supplement. The present prospective biomass energy pipeline is estimated by IFC to be at about 2,500 MW or larger. 42. Other prospective resources of RE are small hydropower, wind, solar, and solid waste. Each option has a good deal of potential to provide electrification solutions in remote areas where grid connections can be cost-prohibitive. Solar power has already been deployed in outer islands and other remote locations. Wind power has also seen limited development in Indonesia due to its high cost, intermittent nature and low wind speeds in the country, although the prospects in the eastern islands are estimated at about 10,000 MW. There is more wide-spread development of small hydropower resources, which could be expanded where resources are available. However, these renewable resources are also generally not likely to offset a base-load technology such as coal since they mainly operate outside the grid, often at household levels. Instead, they are more likely to offset emissions from traditional biomass (e.g., fuel wood and dung) and small 19 PLN carried out a number of tenders for the private sector to invest in coal-based IPPs, yet none of them have reached financial closure. This was partly the reason that led to the Government-led, PLN implemented, first 10,000 MW Fast-Track Program to increase the country s power generation capacity. 20 The Darajat geothermal field was expanded by 110 MW in 2007 by Chevron. 28

29 diesel generators. In order to encourage the development of these relatively abundant resources, the MEMR has issued a policy that aims to establish prices and provides for off-take by PLN for renewable opportunities of less than 10 MW in capacity. While the development impact would be high, emissions reductions from these renewable resources would be lower in comparison to the utilization of biomass and geothermal to offset coalfired power in the grid. 43. The GOI has made RE a priority subsector for development in order to address their energy and climate change needs. It is one of the key subsectors that can help Indonesia move away from the increasing use of fossil fuels (as is the case of the BAU scenario), whereby the country can continue to meet its rapidly increasing power demand needs in an environmental friendly way. There is clear emphasis on developing geothermal energy, as it provides the best opportunity to develop the needed based-load capacity displacing additional use of coal. The GOI is strongly committed to the scale-up of geothermal power in place of coal, as indicated by the prominence of geothermal in the Government s development goals, the substantial reforms undertaken thus far towards this end, and the considerable coordination with international development agencies in this effort. Therefore, CTF support that will leverage multilateral development assistance will be critical in helping GOI achieve its objectives and targets in the sector. 3.3 Transport Sector 44. The transport sector in Indonesia is a significant GHG emitter due to its substantial consumption of fossil fuels. Road transportation consumes 88 percent of primary energy consumption in the sector. Without significant actions to reduce the carbon intensity of the road transportation sector, GHG emissions are projected to double in less than 10 years. Emissions are roughly split between use of motor petrol (gasoline) and diesel and the future projections of GHG emissions (Figure 7) are a matter of concern if current transport modal distribution and technology efficiency trends hold. Figure 7: Projected vehicle CO 2 emissions in Indonesia 29

30 Source: TNA Several of Indonesia s major cities are becoming metropolitan centers in their own right, with populations of up to 5 million inhabitants. They are facing increasing difficulties in meeting their urban mobility needs as car and motorcycle ownership grows and congestion subsequently becomes a serious problem and a threat to their sustained growth. A mix of informal minibuses and regular buses provide inefficient, uncoordinated and unreliable transport services with high social and environmental costs (congestion, accidents, air pollution and GHG emissions). 46. The GOI has recognized these challenges and is taking appropriate steps to develop sustainable public transport systems. Indonesia is already a leader in introducing Bus Rapid Transit (BRT) to Asia through the TransJakarta Busway (December 2004) and is planning to extend this experience to other selected cities. More recently, the Government has amended the Traffic and Transportation Law 22/2009 which makes the provision of dedicated public transport lanes (i.e. BRT) a requirement for any city of more than half a million inhabitants. 47. BRT systems have relatively low capital and maintenance costs. If the share of buses in passenger transport were to increase by 5-10 percent, the CO 2 emissions would fall by 4-9 percent at costs in the order of US$60-70 per tco 2. Home-grown examples such as the TransJakarta Busway provide evidence of environment friendly public transit options for Indonesia s growing cities. Since its opening, TransJakarta has expanded to ten corridors which operates Compressed Natural Gas buses and currently serves over 160,000 passengers a day. Over 20 percent of TransJakarta passengers have switched 30